Europe’s Growth: An Optimistic Perspective

‘Europe gets a solid ‘B’ for its economic growth and an ‘A’ is within reach’.

That was the evaluation given by Indermit Gill, Chief Economist for Europe and Central Asia at the Wolrd Bank, at the annual Jean Monnetconference hosted by the Leiden University‘s Institute of Public Administration. The assessment summarizes a 112-page overview of a 500+ page new report prepared by the World Bank on the past and future of Europe’s economic growth. Mr. Gill presented some of the conclusions of the report and discussed his vision of the challenges facing the European economies. The overview of the full report is well-worth reading – it is quite accessible for non-economists and richly illustrated. In this post we want to take up just a couple of issues that seemed especially salient to us.

The report points out that by the late 2000s, the ease of doing business in South Europe (Greece, Italy, Spain, Portugal) has plummeted below the levels of the Central and East European countries. This is remarkable if we remember that 20 years ago the CEE countries still had state-led planned economies. Many people imagine that setting up a market economy requires just cutting state interference and then the market would grow on its own. But this is hardly the case – in fact, the establishment of a market and the right environment for doing business requires a huge effort in state-building. Installing the rules and regulations conductive for business growth is by no means an easy achievement, and the CEE countries should take the credit they deserve for that.

In the questions and answers section, Dr. Gill pointed out that while the low labour mobility in the EU has not impeded the working of the European ‘convergence machine’ (a very apt metaphor used in the report to describe how Europe has been helping poorer countries to grow and converge with richer EU member states), it is a problem for the eurozone. Inside the eurozone, as the monetary policy instruments are removed from the toolbox of governments, one way to compensate for the imbalances that have occurred since the eurozone is not an optimal currency area, is to allow labour mobility. Without it, the balances become even more glaring. The implications for the current policy of many European governments of restricting immigration cannot be clearer.

Another finding emphasized by the report is that the EU is a huge trading partner for the whole world, but also that a large part of trade happens inside Europe and among European partners. This was presented as the strongest pillar of the European economic success and it’s worth remembering that it is, by and large, an achievement which can most directly be linked to the Single market established by the EU between 1986 and 1992. Again, if any political leaders would seriously consider what their economy would look like without the EU, it’s worth relaying the comment of Dr. Gill, that there is no such thing as a successful small closed economy in today’s world.